Lattice Semiconductor Corporation — Form 10-K summary
Period clarification: The supplied filing is for the fiscal year ended December 29, 2018, not 2017 Q4. Fiscal 2017 ended December 30, 2017. The filing also reports unaudited quarterly results, including Q4 2018.
Business context and reporting period
Lattice develops programmable logic devices, video-connectivity products, and intellectual-property licensing and services. It serves Mobile and Consumer, Communications and Computing, and Industrial and Automotive markets. Fiscal 2018 was a 52-week year. The company is fabless and relies on foundries and other suppliers, primarily in Asia.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Revenue | $398.8 million | $386.0 million |
| Gross margin | $219.4 million; 55.0% | $216.6 million; 56.1% |
| Operating income (loss) | $(3.1) million | $(47.6) million |
| Net income (loss) | $(26.3) million | $(70.6) million |
| Diluted loss per share | $(0.21) | $(0.58) |
| Cash provided by operating activities | $51.5 million | $38.5 million |
| Cash, equivalents and short-term securities | $128.7 million | $111.8 million |
| Term-loan principal outstanding at year-end | $263.0 million | $306.8 million |
Fiscal 2018 product revenue was $380.5 million; licensing and services revenue was $18.3 million. The company reported GAAP operating and net losses, but non-GAAP operating income of $66.6 million and non-GAAP net income of $43.4 million. These non-GAAP measures exclude, among other items, restructuring, acquired-intangible amortization and impairment, stock compensation, and millimeter-wave inventory adjustments.
Cash from operations increased year over year. Cash used in investing was $21.1 million and cash used in financing was $16.8 million, including $43.8 million of debt repayments and $29.3 million of common-stock issuance proceeds. Inventory declined 16% to $67.1 million; accounts receivable rose to $60.9 million and days sales outstanding increased to 58 from 53.
Material changes versus the prior comparable year
- Revenue grew 3%, from $386.0 million, with gains in Communications and Computing and Industrial and Automotive partly offset by weaker Mobile and Consumer and lower licensing and services revenue.
- Industrial and Automotive revenue increased 17% to $158.0 million; Communications and Computing increased 9% to $123.2 million; Mobile and Consumer declined 9% to $99.3 million; Licensing and Services declined 38% to $18.3 million.
- Gross margin fell 1.1 percentage points, primarily because licensing and services represented a smaller share of revenue and the company recorded millimeter-wave inventory reserves.
- Research and development expense fell 20% to $82.4 million, while restructuring charges rose to $17.3 million from $7.2 million. Acquired-intangible impairment was $12.5 million, compared with $32.4 million in 2017.
- ASC 606 was adopted in fiscal 2018 using the modified retrospective method. It increased reported 2018 revenue by $15.6 million versus prior guidance, including $14.1 million from earlier recognition on distributor shipments. Prior-year figures were not restated, limiting direct comparability.
Outlook, management commentary, risks and unusual items
- Management said financial resources should meet working-capital needs for at least the next 12 months and expected to continue significant research and development investment. The filing provides no quantified revenue or earnings guidance.
- The company discontinued its millimeter-wave business in 2018 to improve profitability, reduce infrastructure costs and refocus on core activities. Related expenses totaled approximately $24.1 million, including $8.0 million in inventory reserves, $11.9 million in intangible impairment and $4.2 million in restructuring charges.
- A further restructuring plan, including workforce reductions and facility changes, generated $17.3 million of total 2018 restructuring expense. Management estimated the June 2017 plan would cost $21.5 million to $23.0 million in total.
- Customer and channel concentration are significant: distributors generated 83% of revenue, and Arrow and Weikeng together represented 54%. China accounted for approximately 51% of revenue. Trade restrictions, sanctions, distributor performance and Asia-focused supply-chain disruption could adversely affect results.
- The $263.0 million term loan bears variable interest at one-month LIBOR, subject to a 1% floor, plus 4.25%; its effective rate was 7.30%. Principal is due by March 2021, with quarterly installments and required excess-cash-flow payments. A one-percentage-point LIBOR increase would add approximately $2.6 million of annual interest expense.
- A lawsuit filed in December 2018 seeks $138 million, treble damages and other remedies over products sold around 2008. The company says the claims lack merit and intends to defend them; it could not estimate the likelihood or amount of exposure.
- The HDMI royalty-sharing agreement for periods beginning January 1, 2018 remained unsigned at filing. Revenue recorded under ASC 606 relies on estimates and could change materially when the agreement is finalized.
- Management reported that a previously disclosed material weakness in internal control was remediated; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- How much of 2018 revenue growth reflects underlying customer demand versus ASC 606’s $15.6 million timing effect, and how distributor inventories and sell-through are trending.
- Progress on the HDMI royalty agreement and the eventual allocation of royalties, including any adjustment to estimated revenue or contract assets.
- Debt repayment capacity, variable-rate exposure, maturity/refinancing plans and compliance with credit-agreement covenants.
- Developments in the $138 million lawsuit, and any other litigation or contingency disclosures.
- Whether restructuring and the millimeter-wave exit deliver sustained savings without impairing product development, customer relationships or growth opportunities.
- Exposure to the two largest distributors, China-related trade restrictions, and reliance on a limited number of Asian foundries and subcontractors.